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Lottery Winners: Lump sum or payout over time?

Obviously the best choice is to take both the lump sum payment and the annuity. You get more money that way.
 
Having $300m cash on hand is way different than having $30m in cash dribble in over time.

I really don't understand why anyone wouldn't take the lump sum when you are in family office territory. This idea that the annuity is safer is a joke, you are going to be able to invest in a wider variety of things with your own family office anyway.

I suppose if you don't trust yourself with money maybe dribbling it out might make sense but probably not.
You haven't been paying attention to the maths. The tax aspect skews the decision in favour of the annuity.
 
After our friend won and took the 20y payout, she got a masters and teaching credential. Then started teaching middle school math. Over the years she also bought nearby rentals gradually learning how to manage her assets from the annual checks. She's now retired, checks have long ceased, but has accumulated a large investment portfolio, rental income, and, of course, a teacher's pension.

It clearly changed her life but probably not as much as most would have.
 
You haven't been paying attention to the maths. The tax aspect skews the decision in favour of the annuity.

If you are assuming some kind of normal crappy rate of return sure. But if you have your own family office you are going to be able to invest in a much wider variety of things. You become your own hedge fund and can use riskier and higher return strategies than an annuity.

Ultimately there is no correct answer here. I would take the lump sum because I think I could put the funds to use right away in a productive manner. Other people seem scared of their own shadow and know they will never see this money otherwise so they play it super conservative and try to optimize every dollar by taking the annuity.

If you already have / can make millions the entire thing looks different from a risk perspective.
 
I would take the lump sum because I think I could put the funds to use right away in a productive manner.
If you had a guaranteed annuity for 20 years then you could just as easily borrow the money to "use right away in a productive manner". The interest rate on the loan would likely be less than the tax rate on the lump sum and tax deductible too.
 
Why exactly would an annuity attract less tax than a lumpsum? Is it the differential tax rate thing?
 
Have you not seen the maths in this thread?

Don't you see how my question ties in with the math on this thread?

eta: You do realize that clearly answering the question would have taken no more effort than what you chose to expend your time and energy typing, don't you? Assuming you are clear about this, in your own head, of course. And if you aren't clear, or if you're clear but disinclined to clearly and briefly answering a very clear and very brief question, then not answering would have taken even less time and energy. But of course, you do you, per usual.
 
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Don't you see how my question ties in with the math on this thread?

eta: You do realize that clearly answering the question would have taken no more effort than what you chose to expend your time and energy typing, don't you? Assuming you are clear about this, in your own head, of course. And if you aren't clear, or if you're clear but disinclined to clearly and briefly answering a very clear and very brief question, then not answering would have taken even less time and energy. But of course, you do you, per usual.
That is a lot of typing just to declare that you have no intention of reading anything earlier.

Just for you, I will point out that if we assume a rate of return of 3%, a $20M lump sum would be worth about $1.3M annually over 20 years or about $900,000 annually AFTER TAX. To get the same annuity from a lump sum that has already had tax take from it, you would have to get something like triple the rate of return which is risky.
 
Why exactly would an annuity attract less tax than a lumpsum? Is it the differential tax rate thing?
psion10 may have already cleared this up, but let me say it another way.

If you take the lump sum, you can only invest what's left after paying taxes. In contrast, the lottery operator can invest the whole amount. So you either have to make much more risky investments than the lottery operator or be much better at investing than the professionals who invest billions of dollars.

Nothing to do with different tax rates.

(All this is for big wins on state lotteries in the States. Small wins could involve different tax rates.)
 
That is a lot of typing just to declare that you have no intention of reading anything earlier.


That edit was an afterthought, and put in only to draw your attention to the fact that you were (probably habitually, probably unthinkingly, and entirely unnecessarily) being an ass; and, by drawing your attention to it, to give you the opportunity to correct that if you so choose.


Just for you, I will point out that if we assume a rate of return of 3%, a $20M lump sum would be worth about $1.3M annually over 20 years or about $900,000 annually AFTER TAX. To get the same annuity from a lump sum that has already had tax take from it, you would have to get something like triple the rate of return which is risky.


That doesn't answer my question, not in so many words. I was wondering if you were talking about differential tax rates here, is all. But still, and although you don't spell it out, but thanks nevertheless: the answer seems to be No, and that's what I'll read this as, unless you now correct me on this.

Actually differential tax rates would certainly be a valid reason in favor of the annuities. (Not a clinching factor, obviously; but certainly one factor.) But although that is obvious in principle, but in practice it would depend on the details of how lottery wins are treated, if at all they're treated differently. And since I don't know those details of the tax treatment, hence my question. And also, and unless there's a difference in tax treatment specifically in the case of lottery wins, differential rates won't apply to larger jackpots, even the annuity of which will attract the higher tax rates. Which is a second reason why I asked what I did, to see where that was coming from. (And all of that easily admits of a simple, brief one-sentence answer.)



...As for the rest, that's a larger question, that I wasn't asking at this point. And nor, since you bring it up now, does that follow, at all. That would depend entirely on your assumptions --- your stated assumptions, as well as your implied assumptions. ...But not to get into the details of those assumptions, mine was a simple focused question I got to wondering about while reading the last few posts here, is all.
 
That edit was an afterthought, and put in only to draw your attention to the fact that you were (probably habitually, probably unthinkingly, and entirely unnecessarily) being an ass; and, by drawing your attention to it, to give you the opportunity to correct that if you so choose.
My answer assumed the worst case scenario where both the lump sum or annuity would put you in the top tax bracket. As I showed, the scales tipped in favour of taking the annuity.

Actually, even if the annuity put you in a lower tax bracket, the situation would remain exactly the same. You would still want whatever you invested your (after tax) lump sum in to generate the same annuity as you would otherwise receive whether this is before tax or after tax.

I also indicated that even if you had a sizeable investment that you wanted to make, you might still be better off borrowing against the annuity than taking the lump sum. When rich people want to buy another mansion, they don't cash out their stock holdings which would attract capital gains tax and cause them to lose the income their stocks generate. They borrow the money instead.
 
psion10 may have already cleared this up, but let me say it another way.

If you take the lump sum, you can only invest what's left after paying taxes. In contrast, the lottery operator can invest the whole amount. So you either have to make much more risky investments than the lottery operator or be much better at investing than the professionals who invest billions of dollars.

Nothing to do with different tax rates.

(All this is for big wins on state lotteries in the States. Small wins could involve different tax rates.)


Yes, I gathered as much from psion10's reply, that this has nothing to do with different tax rates. As you rightly point out, that might apply to smaller wins (for which annuities won't apply generally, in any case), but not the larger ones.

-----

While I wasn't actually asking about this larger detail, but you've explained the argument very clearly here. But that argument rests on a number of assumptions. Which may well all hold true; but do they actually all hold true, do we actually know that?

The first assumption that comes to mind would be that the amount is actually available to the lottery operator without tax coming into it; and even in case of state-run lotteries, is that actually the case, is that actually how it works? (It well may; but does it, actually, do we know that?)

The second assumption would be that the lottery operator actually earmarks the lumpsum and pays everything it earns in the form of annuities to the winner. (Again, while that may well be the case, but do we know that is how this works?) What about their operating costs, that may well be significant, and for all we know may even be humongous, in proportion to the wins.

-----

I could go on, there's lots and lots of assumptions loaded in there. Assumptions which render a generalization like this invalid (or at least, not quite invalid, but dependent squarely on the validity of the assumptions themselves, on a case to case basis).

And in any case, I don't see why one would even need to generalize, at all. The jackpot winner will surely be clearly presented with the details of the two options: how much exactly will the lumpsum payout be (before tax); and, importantly, also how much exactly will be the annuity payouts (before tax); so that the winner can then simply compare the two options directly, as it would apply to him.

(Again, I don't actually know if lotteries offer straight terms like that. I imagine they would; but do they? They might, I suppose, say something like, "No fixed annuities, we'll pay you whatever we make on how we invest." That sounds very unlikely to me, but for all I know they may say that. Do they? If they do, then the lottery winner should certainly ask about the parameters of their investments and the payout, rather than making sweeping assumptions that may or may not hold.)
 
My answer assumed the worst case scenario where both the lump sum or annuity would put you in the top tax bracket. As I showed, the scales tipped in favour of taking the annuity.

Actually, even if the annuity put you in a lower tax bracket, the situation would remain exactly the same. You would still want whatever you invested your (after tax) lump sum in to generate the same annuity as you would otherwise receive whether this is before tax or after tax.


Like I said, I don't think that follows. There's loads of assumptions baked in there, that may or may not hold. (See my comment, that I addressed to Startz just now, just above.)

Of course, you might be speaking from actual knowledge of how those assumptions hold up, in actual specific cases. If that's the case, then sure, I'm happy to defer to your informed take on this. Is it, though?


I also indicated that even if you had a sizeable investment that you wanted to make, you might still be better off borrowing against the annuity than taking the lump sum. When rich people want to buy another mansion, they don't cash out their stock holdings which would attract capital gains tax and cause them to lose the income their stocks generate. They borrow the money instead.


Again, that also is an argument with loads of assumptions baked in. Doesn't make sense to make sweeping generalizations like that.

For one thing, "rich people" don't always borrow to spend, not at all. They might, sometimes; but often enough they don't! And in any case, this "rich people" thing isn't an apples-to-applies thing at all, unless the lottery winner is a "rich person" himself, to whom this jackpot only represents one income stream among many other comparable streams. ...For instance, if the loan is strictly securitized, and predicated completely on annuity payouts, then that balances out the default risks. But I don't know if an otherwise not-rich winner might be able to swing such a deal. In which case he's opening himself up to catastrophic risks, that he may not even be in a position to face. (Which, while not a clinching factor, and also not a very likely factor in case of state-backed annuities, is definitely a factor on the 'against' side.)

One general principle when you borrow to invest (or borrow instead of drawing down on your investments, same thing really) --- and I'm "generalizing" here myself, I admit, but only to draw attention to the general principle here --- is that when you do that, that leverage basically increases your risk level, other things being equal. Now that doesn't disqualify that option obviously; but, other things being equal, that simply ups your risk, as a general principle.

I do agree with your differential-tax-rate argument though, I mean the differential between tax rates for "income" and "capital gains". I agree, that's a strong factor in favor of leverage. But again, I most certainly wouldn't, basis that one factor, directly assume that this is a better option. That's definitely and without question a case-to-case thing.
 
There's loads of assumptions baked in there, that may or may not hold.
I am not making that many assumptions (although the actual numbers may vary).

The key assumption is that the annuity is guaranteed (not an unreasonable assumption for a state run lottery). If you have any reason to believe that you might not receive all of your annuity payments then you might choose the lump sum even if it means taking a hair cut.

Fortunately for me, this discussion only applies to Americans. In Australia, windfall gains are not taxed so a lump sum would probably be preferable (in fact, a regular annuity might be classified as income and thus taxable).
 
Windfall gains not taxed at all? That's remarkably generous! Australia seems a great place to be in, if one can bag a huge jackpot! (Although I suppose any place would do fine, the details notwithstanding, if one can bag a really huge jackpot --- short of places with warlords and lawless gangsters who'll whisk people off to relieve them of the hassle of worrying about where to invest it all.)


eta: As to the meat of your comment, well, not to beat this to death, but I did specify implicit assumptions as well as stated ones. There's lots of implicit assumptions lurking there. ...On the other hand, my response to Startz was basis what he'd spelt out. To the extent your actual argument might differ from what he told me, sure, some of those implicit assumptions may not apply.
 
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Australia seems a great place ...
is just a pretty good statement in general. (Admittedly, I've mostly only spent time in Sydney.)

My answer does indeed assume the actual operation of the major inter-state lotteries in the U.S.

Yes, if you win you get explicit offers of lump sum versus annuity. If what you care about is the total amount you can spend over time--and there could certainly be other things you care about--then you still have to go through the exercise of figuring out what stream of payments you can earn if you take the lump sum.
 
psion10 may have already cleared this up, but let me say it another way.

If you take the lump sum, you can only invest what's left after paying taxes. In contrast, the lottery operator can invest the whole amount. So you either have to make much more risky investments than the lottery operator or be much better at investing than the professionals who invest billions of dollars.

Nothing to do with different tax rates.

(All this is for big wins on state lotteries in the States. Small wins could involve different tax rates.)

This is all assuming you want to make the most money possible.

Your decision in the matter should depend on your financial risk profile.

For example, if the annuity investments are by default kept in a high risk investment model and you are risk-averse, you might be happier to take the lump sum and invest it yourself in lower risk investments, with a smaller but safer annual income.
 
For example, if the annuity investments are by default kept in a high risk investment model and you are risk-averse, you might be happier to take the lump sum and invest it yourself in lower risk investments, with a smaller but safer annual income.

At least in the US, the annuities are guaranteed. So, there is no (or almost no) risk.
 
One factor I haven't seen considered is that some of of the annuities do not pay out in equal amounts each year. For example, the Powerball pays out in increasing amounts. For the current jackpot, the 30 yearly payouts start at about $22,000,000 and increase to about $87,000,000 the last year.

So, yeah, I probably wouldn't take the annuity just because I won't see that last payment - even though I wouldn't mind leaving most of the money to my heirs and charity.
 
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Both Business Insider and Money magazine say that taking the lump sum is the better option if your investments can yield a modest return of about 3% or greater:

https://www.businessinsider.com/sho...or-the-lump-sum-if-you-win-the-lottery-2013-9

https://money.com/powerball-lottery-annuity-or-lump-sum/

ETA: "Best" is defined as making the most money through investments even if you take some of it out to spend.
Interesting about the annuity that grows by 4% per year for 30 years.

Business Insider concludes that if you can get a rate of return of 7% or more then a lump sum beats an (after tax) annuity that is entirely invested every year. But I think that they are reasoning this backwards (not to mention that the return on the invested annuity could be subject to tax itself).

A lump sum of $213M invested at 4% would give an annuity of $7.1M increasing by 4% pa each year for 30 years.

The question should be what rate of return would you need to generate the same annuity if tax was taken out of the lump sum first?

They use a tax figure of 40% which would mean that the lump sum you have to invest would be $127.8M. By my calculation, you would need an 8.15% rate of return to generate the same annuity.

ETA The tax on the annuity would be lower because part of it is the return on the lump sum and the rest is deducted from the lump sum itself so maybe 7% is the better figure.
 
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If you had a guaranteed annuity for 20 years then you could just as easily borrow the money to "use right away in a productive manner". The interest rate on the loan would likely be less than the tax rate on the lump sum and tax deductible too.

Last time someone gave me $10M I 10x'd it in 4 years.

How? Put the money to productive use by creating a company and selling it for 10x the investment 4 years later. It's now a business unit of Microsoft.

This is why I'm saying the world looks differently if you know what to do with the capital. A few hundred million into my own hedge fund would give returns a lot better than some annuity.
 
Obviously the best choice is to take both the lump sum payment and the annuity. You get more money that way.
I think you were joking, but that's actually what some (well, at least one) financial advisors recommend. Take the lump sum and use it to purchase an annuity that offers a better return than the government bonds that the Powerball lottery uses.

Blanchett advises winners to do a "combination of both an annuity payout and a lump sum." Based on this advice, winners would take the cash prize and then purchase their own annuity through a private company. By purchasing their own annuity, there's the possibility of a higher return.

https://money.cnn.com/2016/01/14/ne...l-payouts-winners-annuity-lump-sum/index.html

Other than a little more certainty and a little less risk, I don't see how that is much different than using other ways of investing what you don't spend.

BTW, right now the Powerball annuity looks a little more appealing than usual because the bonds they use to back the annuity are paying more than usual for the past few years. OTOH, stocks are lower so it might be a good time to invest that lump sum! :-)
 
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Last time someone gave me $10M I 10x'd it in 4 years.

How? Put the money to productive use by creating a company and selling it for 10x the investment 4 years later. It's now a business unit of Microsoft.

This is why I'm saying the world looks differently if you know what to do with the capital. A few hundred million into my own hedge fund would give returns a lot better than some annuity.

And what do you think the odds are of the average lottery winner coming close to this feat? :)

PS: Maybe you should buy the forum for a new hobby?
 
After I win the Powerball drawing Monday night, I am going to hire a good attorney and contact my financial advisor. I am going to tell them what I want to do then I am not going to worry about taxes and investments.

As interesting as this discussion is, everyone's situation is different.

Seriously, though, I think I would be happier winning one of the $1,000,000 payouts. That would be enough to help my wife and I enjoy our retirement a little more as well as help out some others in our family. But, it wouldn't dramatically change our lives like a jackpot win would.
 
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And what do you think the odds are of the average lottery winner coming close to this feat? :)

Pretty low. Which was why I was saying that if you are the kind of person who can't deal with the money maybe take the annuity.

PS: Maybe you should buy the forum for a new hobby?

Haha not a chance. What's to buy at this point anyway?
 
After I win the Powerball drawing Monday night, I am going to hire a good attorney and contact my financial advisor. I am going to tell them what I want to do then I am not going to worry about taxes and investments.

I doubt your financial advisor would know what to do with a few hundred million. What you want are people that manage family offices. If you don't know enough about it to form your own joining an existing multi family might be a good way to go.
 
A few hundred million into my own hedge fund would give returns a lot better than some annuity.
If your own hedge fund can give a rate of return that is more than double or triple the rate of return assumed by the lottery fund when they calculate the annuity then lump sum is the way to go.

Of course, somebody that investment savvy won't be wasting money on lottery tickets unless the jackpot is so high that it tips the expected return in favour of the ticket buyer.
 
How about, winning the lottery is a good problem to have. Either way you're rich. Whether you want to take it all at once or a little bit over time is up to personal preference.
 
How about, winning the lottery is a good problem to have. Either way you're rich. Whether you want to take it all at once or a little bit over time is up to personal preference.
I suppose that if you want to give a non-answer to the question that was asked you could say that.
 
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